Markets in the U.S. and Europe were closed for Good Friday, and the long Easter weekend brings with it a welcome respite from the drama that has wracked global stocks for weeks due to the coronavirus pandemic.
With death and despair still spreading and the country tipping into what economists say may be the worst recession in decades, Wall Street sits thousands of points lower than its all-time high in February but appears to have stabilized well considering all the uncertainty.
But how could that be when the number of people filing for unemployment benefits each of the last two weeks was about 10 times the previous record? Vast swaths of American business are shuttered indefinitely. The economic quarter now underway will most likely feature Great Depression-caliber shrinkage in economic activity.
Yet at Thursday’s close, the S&P 500 was up 25% from its recent low March 23. It is down only about 14% this year — and is up from its levels of just 11 months ago.
There are answers why.
But the juxtaposition of an economy in free fall and a stock market that is, in the grand scheme of things, doing just fine, appears strange.
On Thursday, the S&P 500 rose 39.84 points to 2,789.82. The Dow Jones Industrial Average added 1.2%, to 23,719.37, and the Nasdaq climbed 0.8% to 8,153.58.
Two powerful forces are pushing the economy and the stock market in opposite directions.
Commerce is being disrupted to a degree that seemed impossible weeks ago. But simultaneously, stock investors are betting that powerful interventions out of Washington — including an additional $2.3 trillion in lending programs from the Federal Reserve announced Thursday — will be enough to enable major companies to emerge with little damage to their long-term profitability.
It is a battle between collapsing economic activity and, to use a silly meme from finance Twitter, the federal government’s money printer going “brrr.” In the stock market, at least, the revving of the money printer is winning.
The jobless paradox
Paradoxically, said Gene Goldman, chief investment officer of Cetera Investment Management, the shockingly high numbers of jobless claims can even be viewed as helpful to the market, as they increase political pressure on Congress to scale up rescue measures beyond the $2 trillion legislation already enacted.
“Imagine you’re a Democrat or a Republican talking about 16 million people unemployed,” he said. “It really creates more bipartisan pressure to support the next stimulus package.”
The large companies that make up major stock indexes tend to have reliable access to capital, particularly after the Fed’s latest actions to prop up corporate lending. They may be more likely than small, independent-owned businesses to weather the economic storm and come out on the other side with greater market share and profits.
Forecasts see mild hit
The analysts who project corporate earnings are, in the aggregate, forecasting a relatively mild hit. They expect the companies that make up the S&P 500 to experience only an 8.5% decline in earnings in 2020, with revenue falling 0.1%, according to FactSet.
Then there are technical factors.
Some of the strongest performers in this market rally have been the companies most severely affected by the coronavirus crisis, such as cruise lines, hotel chains and airlines. That suggests “short squeeze” dynamics, in which a small upturn forced investors betting against those companies to close out their positions, turning the small rally into a large one.
Finally, the gush of money into safe investments, from private savers and the Fed, is pushing down longer-term interest rates. That makes even weak or uncertain future earnings for shareholders more appealing than they would have been when interest rates were higher.
What it all means
But just because there are reasons for the stock market rally does not mean those reasons are good ones.
Stock prices are always based on what the world will look like in the future, not the present. In the global financial crisis, stock prices bottomed out in March 2009. The economy did not begin expanding again until July, and the unemployment rate would not peak until October.
But current market pricing suggests that investors are counting on a speedy rebound.
“If this doesn’t go on much longer than expected, if it really is a three- to six-month event from the time we turned the switch on the economy off to when we turn it on, then markets have already accounted for that and are looking ahead,” said Jim Paulsen, chief investment strategist for the Leuthold Group. “It could be that the virus stays hot, and this situation stays in place for three or four quarters, and we’re not priced for that.”
Fed overshadows jobless news
The U.S. central bank’s announcement of programs to provide up to $2.3 trillion in loans to households, local governments and businesses also completely overshadowed a government report that another 6.6 million people applied for unemployment benefits last week. Stock investors expected such dismal numbers, and some are looking ahead to a possible reopening of the economy.
“It looks like the Feds are on a mission to blow holes in every dam that stops the flow of credit. And it sure sounds like they have plenty more dynamite if needed,” Stephen Innes of AxiCorp. said in a commentary.
The stock market is not the economy, and that distinction has become even more clear this week. For the week, the S&P 500 jumped 12.1%, its best performance since late 1974.
Stock investors are continuously looking ahead to where the economy will be a few months or more in the future, which largely depends on the state of the coronavirus pandemic and on the mass shutdowns meant to contain it.
While hopes are building that a plateau may be arriving for infections in several hot spots, it’s not assured.
Wall Street’s gamble
In effect, financial markets are betting that there is some reasonable approximation of normal on some foreseeable horizon.
The current pricing assumes that a cascading series of failures will not happen. That widespread job losses and drops in income will not cause the mass closure of businesses. That people will have a job to go back to and will be willing to spend when the public health crisis ebbs.
Everything about this crisis has been incredibly fast, with the economy going from full health to devastating recession within weeks. In that sense, the financial markets are preemptively adjusting to a possible world in which trillions of dollars from the Treasury and the Fed do the trick and prevent the virus from doing lasting damage.
“The stock market during periods of stress can be quite manic,” said Jason Pride, chief investment officer of private wealth at Glenmede. “What is happening here is a flip-flopping of perception from the ‘sky is falling’ for the majority of March, to being able to glimpse a light at the end of the tunnel today.”
It is, in other words, an unusual time in which we can only hope that stock investors know something that millions of people facing a catastrophic economic situation do not.
The latest on OPEC
The OPEC oil cartel and nations including Russia have agreed to boost oil prices by cutting as much as 10 million barrels a day in production, or a tenth of global supply. More countries, including the United States, were discussing Friday their own cuts in what would be an unprecedented global pact to stabilize the market.
The agreement between OPEC and partner countries aims to cut 10 million barrels per day until July, then 8 million barrels per day through the end of the year, and 6 million a day for 16 months beginning in 2021.
Mexico had initially blocked the deal, but its president, Andrés Manuel López Obrador, said Friday he had agreed with President Donald Trump that the U.S. will compensate what Mexico cannot add to the proposed cuts.
That paves the way for cuts that experts estimate could reach 15 million barrels a day in all -- about 15% of world production. Such a move would be unprecedented both in its size and the number of participating countries, many of whom have long been bitter rivals in the energy industry.
The price of crude is down by more than 50% since the start of the year . While that helps consumers and energy-hungry businesses, it is below the cost of production for many countries and companies. That has strained the budgets of oil-producing nations, many of which are developing economies, and it has pushed private companies in the U.S. toward bankruptcy.
Analysts warn even these proposed cuts may not be enough to offset the loss in demand during the longer term, as the coronavirus pandemic has decimated demand for energy around the world.
On Thursday, benchmark U.S. crude oil fell $2.33, or 9.3%, to $22.76 per barrel after investors learned that Russia and members of OPEC had reached a preliminary agreement. Brent crude fell $1.36, or 4.1%, to $31.48 per barrel.
— Compiled by ArLuther Lee for The Atlanta Journal-Constitution. Neil Irwin of The New York Times was the principal writer of this report. Daria Litvinova, Cathy Bussewitz and Elaine Kurtenbach also contributed for The Associated Press.